UK Defence Budget spend and four Small Cap players
Companies: AVON, CHG, CHRT, SRT
He has been around the track a few times, now this former stockbroker and AIM company boss, gives us his views and pointers on his specialist subject – The UK Smaller Company Sector.
His comments are his own, he is not giving readers advice on whether you should Buy, Sell or Hold any of the companies that he might mention in his market ramblings.
He does not know what you might be looking for in your market dealings, so it is imperative that you must make up your own mind on his column’s content.
Check up on the Research Tree Company Profile pages in helping forge your own opinions.
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My Research-Tree ‘Pick of the Bunch’
Crumbs to pick up in defence spend
Did you know that the current UK annual defence budget runs at about £40bn?
In late November last year the British Government approved the largest rise in that annual cost when it signed off on a £16.5bn increase, spread over four years. That is believed to be the largest rise since the end of the Cold War.
And where is the additional spend going? It is for planned orders in shipbuilding, space, cyber, research and other sectors. New frigates, a fleet of logistics ships, multi-purpose research ships, various cyberspace and space assets, a new agency focused on artificial intelligence, the creation of a Space Command centre in Scotland, they are all on the shopping list.
So too is an increase in the spend on military modernisation, research and development, taking in added commitment on future combat air systems. The UK is the largest spender on defence in Europe and the second largest in NATO.
Obviously in a competitive world big chunks of that spending will be directly with or through subsidiaries in the UK owned by overseas groups. However, our UK defence suppliers sell their products and services into the international markets, so there is some balance of trade.
There are a number of UK Small Caps that will, no doubt, pick up some crumbs of all this expenditure over the next few years. I have selected four companies that are of interest and have good investment merit.
They may also have takeover possibilities, remember last year’s £4bn bid for the Cobham group from Advent International – it clearly showed a US appetite for UK defence sector companies that sell into the global market.
Avon Rubber (AVON), mkt cap. £1.1bn, price 3542p
I tend to direct my attention to Small Cap companies valued between £5m to £500m, so at £1.15bn this group would normally be out of my vision. However, I have been following its growth for many years now and I have seen it evolve into a really interesting grouping.
With leading positions in the global respiratory and ballistic protection markets, it designs and produces life critical personal protection systems to maximise the performance and capabilities of its customers.
In respiratory protection its leading range includes mask systems, powered and supplied air systems, filters, spare and accessories.
In ballistic protection it takes in next generation ballistic helmets and body armour, as well as helmet liners and retention systems.
Its markets are towards global military customers, and to the ‘first responder’ market, such as correctional facilities, SWAT and other tactical police units.
With a defence spend 15 times bigger than ours it is not surprising that the US market is big business for Avon.
In a recent note of the company analyst Andy Chambers at Edison Investment Research is looking for the group to increase its current year sales to end September from $214m to $285m, with pre-tax profits increasing 39% to $50m, jacking earnings up from 96c to 131c per share. He states that the group continues to grow strongly as it executes its growth strategy.
The group’s AGM is being held on Friday of next week (29th), so hopefully we will get a positive Trading Update then.
Chemring Group (CHG), mkt cap. £846m, price 300p
This is another company that I have followed for many years, decades even. And it has never lost its investment attractions.
For over 100 years, in over 50 countries, Chemring, which employs some 2,300 people worldwide and has production facilities in four countries, has been supplying innovative solutions to the world’s most demanding customers in the aerospace, defence and security sectors.
Its sensors and information side covers advice, design, engineering, research and solutions. Its offer range takes in: electronic warfare; explosive ordnance disposal; chemical and biological detection; and innovation, technology and data science.
The group’s countermeasures and energetics side is the world leader in the design, development and manufacture of advanced expendable countermeasures and countermeasure suites for protecting air, sea and land platforms against the growing threat of guided missiles.
Advanced flares, special material decoys, naval countermeasures, explosive materials, aircraft safety components, pyro-mechanisms, conventional flares, chaff, space launch initiators and release mechanisms, missile and electronics, breaching and demolition, extruded double base propellants – they cover the gamut.
In the middle of last month the group reported a 20% increase in revenues to £402m in the year to the end of October and an underlying pre-tax profit up 31% at £51.7m.
The group, which now has an increased order at £476m, will give out another Update for its AGM on 4th March. The shares, which have been on a steady climb from 138p in March 2019, should carry on rising as Defence Budgets grow.
Cohort (CHRT), mkt cap £256m, price 625p
Cohort is the parent company of six innovative, agile and responsive businesses providing a wide range of services and products for British, Portuguese and international customers in defence, security and related markets.
Based in Reading, Berkshire, the group employs some 1000 core staff there and at its other operating company sites across the UK, Germany and Portugal.
Early last month this independent technology group announced its half year results to end October. The market was initially disappointed and dropped the share price by 50p from 620p to 570p. That was despite the defence and security markets supplier reporting its operating profit being up 8% at £4.3m on the back of sales down 10% at £54.4m. Earnings were up 12% at 7.74p per share.
Its various subsidiary companies offer a wide range of services, systems and products, taking in defence, security, intelligent transport and subsea engineering.
That range includes - surveillance, tracking and fire-control systems for the defence and security markets; advanced communications systems for naval and military customers; advanced sonar systems and underwater communications for the global naval marketplace; and specialist data technology serving the defence and security markets focused on electronic warfare, digital services and training support.
It also designs, sources and supports advanced electronic and surveillance technology for UK end-users, including the MOD and other government agencies. It also provides technology-based products for the defence and transport markets alongside specialist research and training services.
The basic operational method of the group’s management is to let each of its six main companies be autonomous and entrepreneurial in their own markets. Despite the interim easing in sales the group’s overall order book has increased from £183m last April to a record £218m by the end of October.
Andy Chambers at Edison Investment Research is looking for revenues this year to end April of £142.1m (£131.1m), with pre-tax profits actually increasing a fraction to £17.7m (£17.5m).
For the coming year he goes for £158.9m sales, £19.4m profits and 36.3p of earnings per share.
Just over a year ago the group’s shares were trading at over 720p, it looks as though they will soon be over that price again, despite the group’s chairman selling 285,000 shares last week at 615p each.
SRT Marine Systems (SRT), mkt cap £62.4m, price 38p
Following on from the previous three groups this selection really is just a tiddler in the marketplace – but I feel that it is destined to grow significantly over the next few years. Not strictly within the UK Defence Budget spend it does, however, deliver turn-key coastal and oceanic maritime surveillance and command and control systems for use by Coast Guards and Fishery authorities.
Despite its size it is a global leader in maritime domain awareness products and systems. Its solutions integrate multiple technologies, advanced analytics, innovative digital display systems, logistics and command and control to provide enhanced maritime surveillance, security, safety and management for national authorities, such as coast guards and fishery authorities.
Applications include coastal and territorial water surveillance and security, fisheries monitoring, management and IUU detection, search and rescue, waterway management and aquatic environment monitoring as well.
In particular, the group’s GeoVS application is worthy of strong note.
It fuses multiple sensor sources into a single data set and uses analytics to automatically detect, track and manage vessels on a mass scale, coupled with integrated command and control functionality. It creates a system solution that can scale from a single port to a national system supporting hundreds of sensor towers and operators. It is still very early days in the development of the potential of this group – however its market is truly global.
Analyst Lorne Daniel at finnCap a couple of months ago stated, upon publication of the end September interims, that the group should be giving some guidance on its figures during the second half year. He noted that the group’s validated sales pipeline remains firm at 17 new contract opportunities totalling £550m.
I look forward to the group announcing its pre-close Trading Update in early March.
In the meantime, its shares, which touched 55p just over a year ago, could well edge forward and ahead of the 45p level they recently peaked at early last month. Just imagine the impact upon winning any one of those 17 contracts.
